April 2008

Taiwan’s presidential election of March 22, 2008 indicates a reduction in future cross-strait tension, as winner Ma Ying-jeou is less provocative toward Beijing than Chen Shui-bian has been. The near-term outlook for Taiwan’s future is positive for stability and in policymaking on defense. However, in the longer term, the question of Taiwan’s identity and sovereignty as separate from the PRC remains unsettled. This CRS Report will discuss the results of Taiwan’s presidential election and symbolic yet sensitive referendums on U.N. membership, outlook for Taiwan’s stability and policies, implications for U.S. security interests, and options for U.S. policymakers in a window of opportunity. This analysis draws in part from direct information gained through a visit to Taiwan to observe the election and to discuss views with a number of interlocutors, including those advising or aligned with President Chen Shui-bian and President-elect Ma Ying-jeou.

In a large turnout on March 22, 2008, voters in Taiwan elected as president Mr. Ma Ying-jeou of the Nationalist (KMT) Party. Mr. Ma out-polled rival candidate Frank Hsieh, of the pro-independence Democratic Progressive Party (DPP), by a 2.2 million vote margin of 58 percent to 42 percent. Coming on the heels of the KMT’s sweeping victory in January’s legislative elections, the result appears to be a further repudiation of DPP leader and Taiwan President Chen Shui-bian’s eight-year record of emphasizing a pro-independence political agenda at the expense of economic issues. President-elect Ma, who will begin his tenure on May 20, 2008, has promised to improve Taiwan’s economic performance, to improve Taiwan’s damaged relations with the People’s Republic of China (PRC), and to address any annoyances in Taiwan-U.S. relations arising from the Chen Administration.

The authors present a stylized real model of the Chinese economy with the objective of explaining two features: (1) domestic production is highly competitive in the sense that an accumulation of capital that raises the marginal product of labor elicits increases in employment and output rather than only in wages; and (2) even though the domestic saving rate is high, foreign direct investment is also substantial. They explain these features in terms of a conventional neoclassical growth model—with no monetary or nominal exchange rate policy—by including two aspects of the economy explicitly in the model: (1) low production wages are sustained by a large reserve army of rural labor which drives internal migration, and (2) domestic capital is distinct from importable capital and complementary with it in production. The results suggest that underlying real phenomena are important in explaining recent history; while nominal renmimbi appreciation may dampen price and wage increases, it would probably not change the real factors that have sustained rapid growth.